DEPARTMENT OF AGRICULTURE AND RELATED AGENCIES APPROPRIATIONS FOR 1966

WEDNESDAY, JUNE 2, 1965

U.S. SENATE,

SUBCOMMITTEE OF THE COMMITTEE ON APPROPRIATIONS,

Washington, D.C. The subcommittee met at 10 a.m., pursuant to recess, in room 1114 New Senate Office Building, Hon. Spessard L. Holland (chairman of the subcommittee) presiding.

Present: Senators Holland, Ellender, Yarborough, Young, and Aiken.

FARM CREDIT ADMINISTRATION

STATEMENTS OF ROBERT B. TOOTELL, GOVERNOR; JAMES E. PITTS, JR., BUDGET OFFICER, AND FREDERICK W. HOWARD, ASSISTANT BUDGET OFFICER

1966 BUDGET REQUEST

Senator HOLLAND. The subcommittee will please come to order. The first agency to be heard this morning in justification of budget estimates for fiscal 1966 is the Farm Credit Administration, an independent agency which supervises important credit functions of agriculture.

The administrative limitation requested is $2,990,000 for 1966, which is $59,000 more than the limitation for 1965. The increased limitation is primarily to cover the cost of vacancies which will be filled for the fiscal year 1966.

Robert Tootell, Governor of the Farm Credit Administration, is here and has submitted a statement to the committee.

Governor Tootell, how do you wish to proceed?

Mr. ToOTELL. Mr. Chairman, with me is Mr. James Pitts, our budget officer and Mr. Fred Howard, our assistant budget officer. Paul Ritter, our General Counsel, is unable to be here this morning.

I have, sir, a statement from Mr. L. C. Carter, the Chairman of the Federal Farm Credit Board, that I would like to file for the record if it meets with your approval.

Senator HOLLAND. Without objection, the statement of Chairman Carter will be filed for the record.

(The prepared statement of L. C. Carter follows:)

STATEMENT OF L. C. Carter, CHAIRMAN, FEDERAL FARM CREDIT BOARD

The Federal Farm Credit Board of which I am Chairman consists of 13 members, 1 appointed from each of the 12 farm credit districts by the President with the advice and consent of the Senate. The 13th member is designated by the

Secretary of Agriculture. The Board is charged with the general direction, supervision, and control of the Farm Credit Administration. It is concerned with policy and its regular meetings are scheduled for 3 days every 2 months. The day-to-day operations are handled by the Governor of the Farm Credit Administration and his staff.

OBJECTIVES OF FEDERAL FARM CREDIT BOARD

The major objective of the Federal Farm Credit Board, since it was created in December 1953, has been to determine ways and means of carrying out the policy of the Congress as set out in the Farm Credit Act of 1953. This act directed the Board to make recommendations to the Congress for carrying into effect the declared policy to increase borrower participation in the management, control, and ultimate ownership of the permanent system of agricultural credit made available through the banks and associations operating under the supervision of the Farm Credit Administration. In developing its recommendations, the Board has sought and received the cooperation of many interested groups.

LEGISLATIVE RECOMMENDATIONS

The Board, since its inception, has recommended major legislation to Congress relating to each group of banks and associations under its supervision. The recommendations applicable to the banks for cooperative and intermediate credit banks, in general, have been directed toward the retirement of the Government's investment in these banks and complete ownership by their member users. The legislative proposals made on behalf of the Federal land banks and Federal land bank associations have brought about decentralization of a number of functions from the Washington office to these banks and associations. Also numerous recommendations have been made that resulted in improved long-term credit service to their borrowers. As you know the land banks have been fully memberowned since 1947.

BANKS FOR COOPERATIVES

The first major legislation proposed by the Board and enacted into law (Farm Credit Act of 1955) related primarily to the banks for cooperatives. Among other things that this law provided was the eventual ownership of the banks by their users. This is to be accomplished by the gradual replacement of Government capital with funds invested by the borrowers. Also, the law provided for the reorganization of the Central Bank for Cooperatives, particularly with respect to the selection of its board of directors, and the making of loans by the central bank only when it is not practicable for regional banks to make them. Since the enactment of this legislation, substantial progress toward the major objective of farmer ownership has been made. The banks have retired $83 million of Government capital and it is estimated that they will retire an additional $13.5 million in the fiscal year 1966, thereby reducing the Government investment in the banks for cooperatives from $150 million on January 1, 1956, to $53.5 million. The first of these banks will pay off their Government capital in full by June 30, 1965. Several other banks are anticipating paying off in the next 2 or 3 years, and all banks by 1970.

Subsequently, a number of other laws pertaining to the banks for cooperatives have been enacted as a result of Board recommendations. The banks were authorized to sell consolidated debentures. The size of the Board of the Central Bank for Cooperatives was enlarged from 7 to 13 members to provide for more direct representation by the district banks. The banks were given authority to retire the equity in a bank which was owned by a cooperative association at the time of liquidation or dissolution of the association. The revolving fund available for subscriptions to the capital stock of the banks was reduced to $150 million. In 1963, the Farm Credit Act of 1933 was amended to provide that 20 percent of the annual patronage allocations of a bank for cooperatives made to their users be paid in cash after all Government capital in the bank has been retired so that the full amount of these allocations may be qualified as deductions from the gross income of a bank in computing its taxable income.

FEDERAL INTERMEDIATE CREDIT BANKS

In 1956, at the suggestion of the Board, legislation was passed by the Congress, which changed the Federal intermediate credit banks to a cooperative basis of

operation. This act provided a means whereby the Government's investment in the banks would gradually be replaced with capital invested by the production credit associations, which will eventually own in full these banks. Another part of this legislation provided for the merger of the production credit corporations into the credit banks. The main function of these corporations had recently been to supervise the production credit associations and with the merger, this activity was taken over by the credit banks. Also, the Federal intermediate credit banks and the production credit associations revolving funds were merged.

The retirement of Government capital in the credit banks has not moved along as fast as originally contemplated due to the needs of these banks to finance the rapid increase in the demand for short-term credit which has been placed upon the production credit associations in recent years. Actually, $47 million of additional Government capital has had to the invested in several of the banks in order to maintain their statutory 10 to 1 debt-to-capital limitations even though the banks, during this period, have increased their net worth by $67 million from earnings. It has become apparent, therefore, that further legislation will be necessary to fully accomplish the shift from Government to private ownership. In order to reduce the trend of the Federal intermediate credit banks' requiring more Government capital, the Board recently submitted to Congress proposed legislation which has been introduced as S. 522 and H.R. 4152. The latter bill was passed by the House on March 15. The purpose of this legislation is to enable the credit banks and production credit associations to continue to extend the credit service expected of them while at the same time reducing or eliminating the need for more Government capital and expediting the return of such capital now in the banks. This is to be accomplished by changing the debt-to-capital ratio from 10 to 1 to 15 to 1 and under certain circumstances calling on the production credit associations to invest additional capital in the banks.

FEDERAL LAND BANKS

With respect to the land banks, legislation was enacted whereby the function of making appraisals was transferred from the Farm Credit Administration to the banks. From time to time other amendments have been made to adjust the terms of land bank loans so that credit services can be made more responsive to the many changes taking place in agriculture. For example, the size of loan that can be made was left to the judgment of the Farm Credit Administration. Monthly installment loans were permitted as were also unamortized and partially amortized loans, etc.

OTHER

In 1959 a law was passed clarifying the status of district farm credit banks and their employees. A major purpose was to specify that certain Federal statutes applicable to Government employees should not apply to the employees of these banks. Those employees under civil service retirement at December 31, 1959, however, remained covered, but new employees, with minor exceptions, will be covered by the retirement plan developed in each district.

From time to time, the Board has recommended and Congress has approved general legislation which has facilitated the operations of the Farm Credit System without making major changes in the statutory authorities under which the banks and associations function. It is anticipated that additional legislation along these lines will be submitted to Congress during this session.

The Board continues to seek the best ways and means to provide the most effective credit service possible to farmers and their cooperatives at the lowest cost consistent with sound business principles. New approaches continue to be explored and, where proved feasible, are used in its efforts to insure that the needs of an ever-changing agriculture are financed on a sound basis. The Federal Farm Credit Board continues to work for economical and efficient operations for all parts of the System.

STATEMENT OF GOVERNOR TOOTELL

Mr. TOOTELL. I also have a statement on my own behalf which I would like to have filed for the record.

Senator HOLLAND. Without objection, that will be filed.

(The prepared statement of Governor Tootell and justification statement follow :)

We have for consideration the budget estimates of the Farm Credit Administration. Sound administration and operation at a prudently economical cost is the policy of Farm Credit Administration and the agencies it supervises. The administrative expense limitation representing authorization for expenditures of assessments collected from farm credit banks and associations is estimated at 2,990,000 for 1966, which is 59,000 more than the latest estimate for 1965. The increase of 59,000 for 1966 over 1965 is necessary primarily to cover the cost of vacanices which will be filled for the full year 1966.

I would like to review briefly the organization and activities of Farm Credit Administration and the farm credit banks and associations, and to comment on the agricultural and economic conditions which will have a bearing on them.

FARM CREDIT ADMINISTRATION

The Administration is an independent agency in the executive branch of the Government under the policy direction of the Federal Farm Credit Board. It provides for supervision and examination of a coordinated system of farm credit banks and associations which make loans to farmers and their cooperatives. The expenses of the Administration are paid from funds provided by assessments collected from these banks and associations. The System consists of 37 banks and 1,218 local associations. The 12 Federal land banks make real estate mortgage loans on farms through Federal land bank associations.

The 13 banks for cooperatives make loans to farmer cooperatives. The 12 Federal intermediate credit banks provide agricultural loan and discount facilities for production credit associations and other eligible financing institutions. The 736 Federal land bank associations and 482 production credit associations are credit cooperatives located in farm communities. They provide convenient service to members. Loan funds of the banks and associations primarily come from the sale in the open market of bonds and debentures. These are not guaranteed by the Government either as to principal or interest.

AGRICULTURAL CREDIT TRENDS

The Farm Credit Administration and the farm credit banks and associations, which it supervises, endeavor to follow closely the changes in agriculture that affect farmers' use of capital and credit. This includes studying shifts and trends in agriculture that affect the financial position of farmers. It also involves keeping up with changes in the demand for farm products as well as fluctuations in the volume of agricultural output which influence farmers' plans for using credit. Major trends causing farmers to use more capital and credit are commercialization and specialization in agriculture and the larger size of farm operations.

AGRICULTURAL CONDITIONS

Gross incomes received by farmers in the United States reached a new peak of $41.9 billion at the end of 1964 as compared with $41.7 billion in 1963 and $41 billion in 1962. The increase in gross income received in 1964 was due to a larger total volume of farm output. Commodity prices averaged slightly lower than in 1963. Because of increased farm production costs, the net farm income level of $12.5 billion was approximately the same as the levels since 1961.

Farmers' production expenses reached a new high of $29.4 billion as compared with $29.2 billion in 1963, and $28.4 billion in 1962. Since 1961, the increase in gross income has been offset by higher production expenses. However, as the number of farms continued to decline, net income per farm reached a new peak of $3,593 in 1964 compared with $3,504 in 1963.

The average level of all commodity prices received by farmers in 1964 was about 2% percent lower than in the previous year.

The physical volume of all farm marketings in 1964 was about 2 percent higher than 1963. Livestock and livestock products marketed exceeded 1963 by about 4 percent while crops sold were 3 percent less than a year ago. Generally, prices received for all crops were slightly higher while livestock prices averaged nearly 5 percent lower than 1963.

FARMERS' FINANCIAL POSITION

The sustained income levels received in the last few years has enabled some farmers to improve their financial position. In total, assets held by farmers amounted to $230.5 billion at the end of 1964 compared with $223 billion in 1963 and $200 billion in 1960. Most of this increase has resulted from higher farm real estate values. Additions to holdings of livestock, equipment, and financial reserves have been modest.

Farmers' debts continued to increase following the upward trend of the past several years. Total debts of farmers increased from $24.1 billion at the end of 1960 and $33 billion in 1963 to $36.3 billion at the end of 1964. All types of farm credit-short, intermediate and long term-have been rising. Longer term mortgage debts of farmers now amount to about $18.7 billion while non-real-estate debts total $17.6 billion. Total debt amounted to $37.8 billion at the end of 1964 including CCC loans. Trends toward commercialization and specialization in agriculture and the larger size of farm units have resulted in increased capital demands.

Higher prices require additional credit to finance the purchase of land, modern buildings, and equipment. Today's commercial and specialized farms require more operating capital. Credit also is needed to finance the shifts and adjustments which are made frequently to maintain and increase efficiency and to meet changing demand.

Since the value of farmers' assets has risen faster than debts, the net worth of farmers has improved. Net worth increased from $174 billion at the end of 1960 and $188 billion in 1963 to $193 billion at the close of 1964.

LOANS OF THE FARM CREDIT BANKS

Farm credit banks and associations advanced a net total of $5.9 billion in credit to agriculture in the year ended June 30, 1964. This compares with $5.3 billion in fiscal 1963 and $4.8 billion in fiscal 1962. Increases occurred in the amount of loans made by each group of banks and associations. Again this year, because of the strong demand for credit from agriculture, the total net amount of outstanding loans held by the farm credit banks and associations increased from $6.3 billion on June 30, 1963, to $6.9 billion in 1964.

The Federal land banks made $852 million of farm mortgage loans in fiscal 1964. This is the largest amount of credit extended by the land banks since 1934. Loans made by the land banks amounted to $682 million in 1963 and $636 million in 1962. On June 30, 1964, the land banks had $3.5 billion in outstanding loans compared with $3.2 billion in 1963 and $3 billion in 1962.

Loans made by the production credit associations in fiscal 1964 amounted to $3.7 billion which compares with $3.4 billion in 1963. Production credit association loans outstanding at the end of fiscal 1964 totaled $2.5 billion compared with $2.3 billion a year earlier.

Most of the credit extended by the Federal intermediate credit banks is in paper discounted for and in loans made to production credit associations. Credit also is extended to other financing institutions such as agricultural credit corporations, livestock loan companies, and commercial banks. Credit advanced to these other financing institutions amounted to $283 million in fiscal 1964 as compared with $274 million in 1963.

During fiscal 1964 the banks for cooperatives made $1.06 billion in loans to farmers' marketing, purchasing, and service cooperatives. This compares with $946 million in 1963. On June 30, 1964, the banks for cooperatives held $757 million in outstanding loans compared with $701 million a year earlier.

OUTLOOK

The farm financial outlook in 1965 is for continued increases in assets and equities with a stable level of net income. Rising costs will offset rising farm income to the extent that net income is expected to remain at about the same level as has prevailed since 1961.

With farm output expected to be at a high level in 1965, farmers again will need large amounts of credit to finance their operations. Because net incomes are under pressure, farmers will be seeking capital funds to finance expansion and improvements. Consequently, it will be necessary for lenders to give increasingly careful attention to repayment capacity in extending credit to agriculture.